Advance tax is a system of paying income tax in installments throughout the year rather than in one lump sum at the end of the financial year while filing ITR. It is applicable to individuals, self-employed professionals, and businesses, that have a tax liability of more than INR 10,000. The objective of Pay-as-you-earn taxes is to enable the government to collect taxes and meet working capital requirements more uniformly.
What is Advance Tax?
As the name suggests, Advance tax means payment of tax in advance. Additionally, it is also called “Pay as you earn” tax since proportionate payment of your total tax liability is to be done quarterly during the financial year.
According to 234C of the Income Tax Act, any shortfall or failure in payment of advance tax attracts a penal interest of 1% per month until thorough tax payment.
Who is liable to Pay Advance Tax?
Every person whose tax liability for a financial year is INR 10,000 or more has to pay this tax on an installment basis. To calculate the tax liability, the taxpayer has to consider income from all heads.
Exceptions on paying Advance tax
A resident individual of age 60 years or more, not having any taxable income under Business and Profession is not liable to pay advance tax.
Tax on different Income Heads
Income is taxable as per the special rates or slab rates as per the IT rule. Accordingly, tax is calculated.
For individuals having income from salary, the employer is responsible for calculating the tax, deduct TDS from the employee’s salary, and deposit the same to Government. Hence, a salaried person does not have a liability to pay this tax.
However, if a salaried person is having income other than salary (for eg. rental income from house property or interest from fixed deposits etc.), and if tax liability on such income is equal to or exceeds INR 10,000 then they are liable to pay this tax on such other incomes.
For example, let’s suppose an employee has changed multiple jobs and has taken the benefit of HRA for the computation of TDS under each employer. Here, the employee needs to pay the difference of self-assessment tax in the form of ‘advance tax’ if the TDS deduction is not adequate.
An individual is liable to pay advance tax on rental income if the tax liability from rent income is equal to or exceeds INR 10,000.
Advance tax liability is reduced by the amount of TDS deducted and deposited by the tenant.
Nowadays, a lot of people invest in the stock market and have capital gains. And, indeed, it is difficult to estimate the earnings in advance in the stock market. Therefore, it is a common query, if they need to pay advance tax or not.
Hence, one needs to pay advance tax on receipt of such income in remaining installments. For e.g., if Tarun has received a CG income that falls under advance tax liability on 20th June 2022, he needs to pay the tax for a consecutive quarter. i.e., 15th September 2022.
Business & Profession
Freelancers and professionals have to calculate and pay this tax on an installment basis. In most cases, TDS deducted by their customers/clients does not cover the total tax liability.
Exemptions under the Presumptive Taxation Scheme
Formerly, until FY 2015-16, assessees opting for presumptive taxation scheme were not required to pay advance tax. However, with effect from FY 2016-17 (AY 2017-18), assessees opting for the presumptive taxation scheme will have to pay the tax amount in a single installment on or before 15th March.
Tax rate applicable for the presumptive taxation scheme:
|Assessee type||Presumptive income||Tax liability|
|Business owners||8% of Turnover or Gross receipts||Tax at slab rates on presumptive income (flat 30% in case of partnership firm)|
|Professionals||50% of professional fee receipts||Tax at slab rates on presumptive income (flat 30% in case of partnership firm)|
How to calculate advance tax?
- Estimate your income
Estimate your total taxable income including income from ongoing projects or new assignments for the year.
- Subtract eligible deductions and expenses
Deduct all eligible deductions such as tax-saving investments and payments (under the old tax regime) and expenses from your total estimated income.
You can deduct the expenses which are directly related to your business or profession.
- Calculate the tax liability
Now calculate the tax liability for your total income on the applicable rates and reduce the taxes paid such as previously paid tax, TDS which has already been deducted from your income.
- Assess your net tax liability
Accordingly, if the resulting tax liability is equal to or more than INR 10,000 then you are liable to pay advance tax on an installment basis as per the schedule given below.
Advance Tax Due Dates
Tax is paid on the following dates of a financial year.
|On or Before||In case of Individual and Corporate Taxpayers other than taxpayers opting for presumptive income u/s 44AD||Taxpayers opting for presumptive income u/s 44AD|
|15th June||15% of net tax payable||NIL|
|15th September||45% of net tax payable||NIL|
|15th December||75% of net tax payable||NIL|
|15th March||100% of net tax payable||100% of net tax payable|
Let’s understand through an example
For example, Mr. Akash has estimated his taxable income for the current year to be INR 20,00,000. He is not eligible to claim any income deductions. According to the rule, he is liable to pay a tax of INR 4,12,500 as per the old regime slab rate.
As per the advance tax rule, let’s calculate Akash’s advance tax:
- INR 61,875 will be paid before or on 15th June.
- INR 1,23,750 will be paid before or on 15th September.
- INR 1,23,750 will be paid before or on 15th December.
- INR 1,03,125 will be paid before or on 15th March.
- In the past, ITD has sent taxpayers emails detailing the advance tax paid over each quarter. This helps the taxpayers to reconcile their records.
- Additionally, for FY 22-23, ITD also sent an email to the taxpayers who paid self-assessment tax in the previous AY.
- Taxpayers were facing difficulty to estimate dividend income accurately. Hence, as per the union budget 2021, the liability of tax will arise on declared dividends or paid dividends only.
In the case of salaried individuals, TDS is deducted from their salary and deposited to the government by their employer. So as far as salary income is concerned, they are not required to pay advance tax. However, for all incomes other than salary, if the total tax on such incomes is equal to or exceeds INR 10,000 then they will have to assess the tax liability on the same and pay tax.
Before every due date for payment of advance tax, you will have to calculate your expected annual income and determine the tax liability on the same. If your total tax liability is equal to or exceeds INR 10,000 then you are liable to pay it as per the schedule given above.
There are two ways of tax payment:
– Deposit in the bank with advance tax challan or
– Online payment using Net banking, credit card, UPI, debit card, etc
As mentioned above, if you miss the advance tax due date or make a late payment of it, you will have to pay penal interest. Under section 234C, interest for default in payment is levied at 1% simple interest per month or part of a month.
You can file the income tax return and claim a refund of the excess amount paid.
Advance tax is a ‘Pay as you earn’ tax, so it is required to be paid during the financial year in four different instalments in case your Taxable Liability is more than INR 10,000 for the financial year which stands true for you.
The due dates for advance tax installments are:
If you are eligible to pay advanced tax but have not paid advance tax, the penalty will be applicable u/s 234B and 234C.
Let us know if you have any further questions!
Hi Team, I had assumed that I will be able to pay advanced tax before March because I thought I could go for presumptive tax filing. But now it looks like I cannot opt for a presumptive taxation scheme. So does it mean that I did not pay the advanced quarterly tax that I was supposed to pay?
If yes, what is the penalty in every case or are there some exceptions to avoid this interest penalty?
Thanks in advance!
You will be charged an interest penalty under section 234C for the delay/non-payment of advance tax during the year @1% per month on the shortfall amount. Additionally, under Section 234B a penalty interest is imposed on the taxpayers in case the advance tax payment is less than 90% of assessed tax liability during the year.
You can avoid interest u/s 234B by paying at least 90% of your assessed tax liability by March 15, 2021.
Hope this helps!
I have LTCG of more than 7 lakhs from the equity for this year. Is there a way to reduce my tax liability? Also, do I have to pay the tax in advance? If I fail to do so, what will be the penalty/interest percentage I have to pay during my tax filing in 2020?
Hey @ViraajAhuja47, you can set off against non-speculative business loss like F&O for the current year. Long-term capital losses for the previous as well as the current year. Yes, you are required to pay advance tax in case your tax liability is more than INR 10,000 for the FY. The penalties for non-payment of advance tax are:
Non-payment of Advance Tax u/s 234B 3: Interest at 1% in case the taxpayer fails to pay 90% of the tax liability in the same FY
Delay in Payment of Advance Tax u/s 234C 1: if there is a delay in tax payment than interest @ 1% is applicable.
Tax paid on or before 31/03/2021 will be considered as advance tax for FY 2020-21. So a trader can determine the profits between 15th March to 31st March and pay the tax on 31st March, there will be no interest levied.
Hope this helps!
Tax audit is applicable when:
You can use this tool to determine if tax audit is applicable to you:
It is always a good practice to file your ITR and report all your financial transactions to avoid notice from the Income Tax Department. Especially after the SEBI and CBDT’s data partnership. If your total income is below the basic exemption limit, you won’t have any tax liability.
Do I have to pay Advance Tax if the TDS for the year is sufficient to cover tax liabliltiy?
Does Dividend on equity shares attract separate Advance Tax or is it just another source of income?
You are liable to pay advance tax if your total outstanding tax liability for the financial year after TDS is above INR 10,000.
To calculate your advance tax liability you need to add your estimated income for the financial year from all sources including - Salary, House Property, Capital Gains, Business & Profession and other sources.
Next, subtract all eligible deductions, expenses, and Tax Credit available to you.
Now, if your outstanding tax liability is above INR 10,000, you need to pay advance tax to avoid penalty u/s 234B and 234C.
Hope this answers your query
You can also use the advance tax calculator to know your advance tax liability under the old and new tax regime
When I pay the advance tax through the ZERODHA-QUICKO platform, does it get saved/stored? For example I have paid for Q1. so when I have to pay for Q2, will this be automatically calculated?
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